894570 Alberta Ltd. v. Michael Lou, 2011 ABQB 327

Court of Queen ’ s Bench of Alberta Citation: 894570 Alberta Ltd. v. Timothy ’ s Coffees of the World Inc., 2011 ABQB 327 Date: 20110512 Docket: 0901 08641 Registry: Calgary Between: 894570 Alberta Ltd. and Michael Lou Plaintiffs - and - Timothy ’ s Coffees of the World Inc., Timothy ’ s World Coffee Inc., Mmmuffins Canada Corporation, Cec Leaseholds Inc., 1023820 Alberta Ltd., 1183044 Alberta Ltd. and 20 Vic Management Inc.

Defendants Corrected judgment: A corrigendum was issued on May 24, 2011; the corrections have been made to the text and the corrigendum is appended to this judgment. _______________________________________________________ Reasons for Judgment of J.T. Prowse Q.C. Master in Chambers _______________________________________________________ Franchisee seeks the return of overpaid rent

1. CEC is the landlord of the Eaton Centre Mall in Calgary, Alberta. CEC head leased space in the mall to Timothy’s Coffee (“Timothy’s”) for use as a coffee/muffin shop. Timothy’s in turn subleased that space to 894570Alberta Ltd. and Michael Lou (the “Franchisee”). While the Franchisee owed sub-lease payments to Timothy’s, it was directed to makethese payments directly to CEC. 2. The Franchisee commenced these proceedings in June of 2009, asserting that it overpaid rent from October of 2000 untilFebruary of 2009, when the sublease ended. Both CEC and Timothy’s are named as defendants.

The Franchisee’s claim is basedprimarily on unjust enrichment, but it also asserts alternative claims in negligence, negligent misrepresentation, breach of contract,breach of fiduciary duty, and breach of a duty to act in good faith. Overpayment claim arises from an alleged error in the calculation of the size of the premises 3. The sublease is a bit unusual, in that it does not state directly the amount of rent that the Franchisee is to pay. Instead, it says thatthe Franchisee is to pay the amount of rent payable under the head lease. 4.

The head lease (and the head lease renewal) in turn describe the rent payable in the following type of language: “$47,415 perannum ... payable in equal monthly installments of $3,951 based on an annual rate of $145 per square foot”. There is a further statementin the head lease renewal that the premises consist of 327 square feet. 5. The Franchisee says that prior to signing the sublease he reviewed the head lease renewal, including the statement that thepremises consist of 327 square feet. The Franchisee paid rent calculated by reference to the 327 square feet. 6.

There is some question as to the size of the premises. The premises may occupy as few as 260 square feet of space. The actualsize of the premises is a triable issue. 7. If the rent is recalculated based on 260 square feet, then the Franchisee overpaid rent by approximately $145,000 during 8 ½years of subleasing. Is the Franchisee’s claim barred by the Limitations Act? 8. CEC and Timothy’s argue that the Franchisee’s claim is barred by the Limitations Act. However, as the Statement of Claim wasissued in June of 2009, it is clear that the claim was made in time regarding rent paid from June of 2007 onwards. 9.

What about the claim for overpayment between October of 2000 and June of 2007? The Franchisee asserts that these claimswere brought in time as it only became aware of the discrepancy in measurements, and thus the overpayment of rent, in the summer of2008, approximately one year before commencing this action. 10.

CEC and Timothy’s respond that, even if the Franchisee actually realized the alleged size discrepancy and overpayment in thesummer of 2008, nevertheless the Franchisee ought to have been aware of the discrepancy in size of the premises (and thus thepossibility of an overpayment of rent) well before then. 11. A court may summarily dismiss a claim because a limitation period commenced when the claimant “ought to have known” of theclaim, even though it was only later that the claimant subjectively realized it had a claim: see Canada (Attorney General) v.

Lameman, 2008 SCC 14 , [2008] 1 S.C.R. 372, 292 D.L.R. (4th) 49, 86 Alta.L.R. (4th)1, 2008 CarswellAlta 398, 429 A.R.

Section 3 ofthe Limitations Act would bar the Franchisee’s claims for overpayment of rent prior to June of 2007 if, prior to that date, Timothy’sought to have known of the injury (overpayment of rent) for which it now seeks recompense.

12 . CEC and Timothy’s assert, correctly, that if the Franchisee had studied both the head lease and the renewal of head lease when it initially became a subtenant in 2000, then the Franchisee would have become aware of the controversy as to the size of premises at that time. 13 . Specifically, the sublease signed by the Franchisee in October of 2000, while not mentioning the area measurements, did incorporate by reference both the head lease dated May 11, 1990 and the head lease renewal dated July 19, 2000. 14 .

Had the Franchisee reviewed the head lease it would have seen reference to an area of 268 square feet, which conflicted with the reference in the head lease renewal of 327 square feet. In other words, the discrepancy in area measurement was apparent on the face of documents available to the Franchisee. 15 . The Franchisee asserts that it focussed on the amount of rent payable, rather than the size of the premises. The size of the premises was only of interest to the Franchisee in that it was used to determine the amount of rent payable. 16 .

What does the Franchisee say about not carefully reviewing the documents available to it with respect to the size of the premises? Timothy’s (which is a much larger, more experienced and more sophisticated entity than the Franchisee), through its deponent during cross-examination, acknowledged that it was standard procedure for a tenant to rely on a landlord’s calculation of the size of premises. Indeed, Timothy’s written argument in this application asserts that Timothy’s was acting reasonably in relying on the statements of CEC’s property manager as to the actual area of the premises.

Is it therefore correct to say that the Franchisee ought to have diligently inquired into the issue of the area of the premises? 17 . In my view it is not possible to conclude beyond doubt that the Franchisee ought to have uncovered the discrepancy in area measurements prior to 2008. The question of whether the Franchisee ought to have realized the overpayment of rent prior to June of 2008 is a complicated issue of mixed fact and law, which ought to be determined by a trial judge after hearing all relevant evidence. Is the Franchisee ’ s claim against Timothy ’ s barred by contractual provisions? 18 .

Timothy’s says that two contractual provisions bar the Franchisee’s claim against it for unjust enrichment. 19 .

The first provision is clause 10 of the sublease between Timothy’s and the Franchisee, which states as follows: The Franchisee hereby acknowledges, confirms and agrees that it is the intention of the parties hereto that this Sublease shall be a completely carefree net sublease for [Timothy’s], and that [Timothy’s] shall not be responsible during the term of this Sublease, for any loss, charges, expenses and outlays of any nature or kind whatsoever arising from or relating to the Demised Premises or the contents thereof and the Franchisee shall pay all such charges, impositions and expenses of every kind and nature relating to the Demised Premises or the contents thereof and covenants with [Timothy’s] accordingly. 20 .

To me, clause 10 is intended to ensure that Timothy receives its rent in full, without incurring any claims or expenses which will result in its ‘net’ recovery being less than full. The situation here is that Timothy’s may have received approximately 125% of the rent provided by the sublease. I do not think that the wording of this clause was intended to preclude the Franchisee from advancing a claim for overpayment which, if successful, would bring Timothy’s back to a net full recovery of rent. 21 .

The second provision to consider is clause 13.2 of the 2005 franchise agreement between Timothy’s and the Franchisee, which states as follows: The Franchisee shall, during the term and after the termination or expiration of this Agreement and in addition to the Franchisee’s obligations contained in

Section 13.1, indemnify [Timothy’s] ... and hold them harmless from and against all claims, losses, liabilities,

actions, suits, damages and costs of any kind for which they are held liable, or which they incur (including solicitor and client costs,travel, investigation and living expenses of employees and witness fees) in any litigation or proceeding as a result of or arising out of: ... (

c) The Franchisee’s taxes, liabilities, costs or expenses of the Franchisee’s Business; ... Without limiting the generality of the foregoing, in the event [Timothy’s] ... shall be made a party to any litigation commenced by oragainst the Franchisee, the Franchisee shall indemnify and save [Timothy’s] .., harmless against all claims, losses, actions, liabilities,suits, damages and costs of any kind whatsoever arising therefrom and shall pay all costs including legal fees incurred or paid by them inconnection with such litigation. 22.

In my view it is arguable that clause 13.2 is meant to apply to claims by outside parties against Timothy’s, such as a slip and fallclaim arising from a customer’s use of the premises. It is true that the clause specifically mentions litigation commenced by theFranchisee, but this is arguably a reference to situations where the Franchisee commences an action against an outside party, and thatoutside party brings Timothy’s into the action by way of counterclaim or third party notice. 23.

If clause 13.2 were interpreted as broadly as suggested by Timothy’s it would exclude any possible claim by the Franchiseeagainst Timothy’s. For example, if Timothy’s wrongfully removed the Franchisee from possession of the premises, clause 13.2, broadlyinterpreted, would prevent the Franchisee for claiming for breach of quite enjoyment. I do not think that clause 13.2 was intended to beas broadly interpreted as is argued by Timothy’s. Does the fact that the Franchisee paid rent directly to CEC prevent a claim against Timothy’s? 24.

The Franchisee’s sublease directed it to make the rent payments under the sublease directly to CEC, and that is what occurred. 25. Timothy’s submits that it is not susceptible to a restitutionary claim for unjust enrichment because it did not receive funds fromthe Franchisee. However, the payments which the Franchisee made were to the credit of Timothy’s, so that Timothy’s liability for rentpayments to CEC was satisfied by the Franchisee’s rent payments.

Counsel for Timothy’s conceded during argument that a claim forunjust enrichment can be made where funds are paid, not directly to the defendant, but to the credit of the defendant, such as where theplaintiff mistakenly pays taxes actually owed by the defendant. Accordingly, it is arguable that the Franchisee may make a claim forunjust enrichment directly against Timothy’s. The Franchisee’s alternative claims for recovery 26. For the reasons given above, I conclude that the Franchisee has an arguable claim against Timothy’s and CEC for unjustenrichment.

Arguably there has been an overpayment of rent by the Franchise which enriched the defendants, causing a correspondingdeprivation of the Franchisee, and occurring without a juristic reason: see Garland v. Consumers’ Gas Co., 2004 SCC 25 , [2004] 1 S.C.R. 629, 237 D.L.R. (4th) 385, 2004 CarswellOnt 1558. 27. The Franchisee also advances its claim on various other alternative causes of action, such as negligence, negligentmisrepresentation, breach of contract, breach of fiduciary duty, and breach of a duty to act in good faith.

In my view, those alternativecauses of action are much more problematic for the Franchisee to assert, particularly as against Timothy’s, which can point to contractualprovisions, including and in addition to those discussed above, in defence of these alternative claims. 28. However, having concluded that the Franchisee has an arguable claim for unjust enrichment, I think I should leave in front of thetrial judge the full spectrum of alternative claims.

I think it would be unwise to use my authority under Rule 7.3 to dismiss “part of aclaim” to strike some, but not all, of the various grounds on which the Franchisee advances its claim for the recovery of overpaid rent.

29 . Accordingly, I am dismissing the defendants’ applications for

summary dismissal. Costs 30 . If the parties cannot agree as to the costs of these applications, they can approach me to make arrangements for submissions as to costs. Heard on the 3 rd and 4th day of March, 2011. Dated at the City of Calgary, Alberta this 12 th day of May, . J.T. Prowse, Q.C. M.C.C.Q.B.A. Appearances: Karim Z. Jivraj Jivraj Knight & Pritchett for the Plaintiffs Ryan C. Penner Macleod Dixon for the Defendants Cec Leaseholds Inc. and 20 Vic Management Inc. Karen McGlone Blake, Cassels & Graydon LLP for the Defendants Timothy ’ s Coffees of the World, Timothy ’ s World Coffee Inc. Mmmuffins Canada Corporation _______________________________________________________

Corrigendum of the Reasons for Judgment of The J.T. Prowse Q.C. Master in Chambers _______________________________________________________ The following replaces Page 6 Dated at the City of Calgary, Alberta this 12 th day of May, . To Dated at the City of Calgary, Alberta this 12 th day of May, 2011.